This guest blog article is written by Stuart Lutz, who provides clarification of the rules pertaining to tax deductible record donations. Lutz is a professional appraiser who operates his own company, Stuart Lutz Historic Documents Inc. More resources on appraisal are available through the SAA Acquisitions & Appraisal Section’s microsite Monetary Appraisal of Archival Materials web page and Bibliography listing.
“My husband is a well-known poet and a retired university professor,” the woman told me on the phone. “We want to donate all his papers to the college where he worked, so we need a donation appraisal from you.”
I asked the woman if her husband was still alive. “Yes, he’s standing right here next to me if you want to speak to him.” I then gave her the bad news; while her living husband’s papers can be donated, their fair market value cannot be deducted from the family’s taxes.
“But…but…” she stammered, “the university officials and the archivists gave their approval. They said I needed to find an appraiser and then we can get a large deduction.”
I explained to her the two major reasons why her husband’s papers cannot be written off; neither self-created archives nor products of paid work can be tax deducted. I cited to the shocked woman some of the IRS regulations and Tax Court decisions, and she said she was going to discuss the matter with her accountant.
In my years of performing donation appraisals, I have found that many archivists are ignorant of basic tax laws, particularly when it comes to donations. Archivists may be signing IRS 8283s on behalf of their institutions for materials that are not allowed to be legally deducted. This brief blog will explain to archivists three of the major categories of items that cannot be tax deducted, and I will cite the laws and Tax Court decisions behind them.
Before discussing the three categories, I will give the IRS’s definition of fair market value (FMV) for donation purposes (the IRS definition for estate taxes is slightly different):
Fair market value is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.
The non-deduction scenarios
There are three types of materials that cannot be tax deducted, and here are the individual scenarios:
Self-created archives cannot be tax deducted. The IRS has ruled that self-created materials cannot be deducted for anything more than the cost of the materials to create the donated item, such as the paper and ink if they are manuscripts, or the canvas and the paint if they are paintings. If a living author wants to donate his or her book manuscripts, all he or she can deduct is the cost of the paper and the ink (which will probably not amount to much). This self-created archive rule applies to every citizen, all the way up to the president. Although we may think that Richard Nixon’s famous “I’m not a crook” line related to Watergate, it was about his illegal tax deductions for his self-created Vice-Presidential archives that he donated to the National Archives. Nixon eventually paid $465,000 in back taxes to the IRS after the donation of his Vice-Presidential archive was disallowed.
Products of paid work cannot be tax deducted. The archival residue from a paid job cannot be tax deducted either. In the mid-1980s, The San Francisco Chronicle newspaper donated to the California Historical Society its clippings library that contained about 7.8 million articles from the Chronicle and other newspapers. The newspaper took a $1.5 million tax deduction in 1983, $458,000 deduction in 1984 and a $891,000 deduction in 1985. The IRS disallowed the deductions since they are the product of paid work, and the Chronicle challenged the ruling. The case went to the Tax Court, where the judges ruled in the IRS’s favor in the 1991 case Chronicle Publishing Co. v. Commissioner of Internal Revenue. The court stated that the business could not deduct a “letter, memorandum, or similar property…for whom such property was prepared or produced.” The Court’s decision concluded that “Because [the San Francisco Chronicle] Company’s basis in the library is zero, Company’s charitable contribution for its donation to Organization [the California Historical Society] is reduced to zero.” In other words, the product of paid work – even if they are letters to someone at the company, like the CEO – cannot be deducted. Likewise, the CEO of a company cannot deduct the papers he or she created while in that role.
Letters written to someone still living cannot be tax deducted. If a prominent alum of your university owns a lengthy correspondence with a President and now wants to donate the letters to the school, those letters cannot be tax deducted either. The reason for this is that such a donation needs a cost basis, and letters received through the mail have no cost basis – they are essentially a gift. In Publication 526 (page 11, middle column), the IRS states about the donation of ordinary income property that they generally limit “the deduction to your basis in the property.” This rule does not apply just to letters received through the mail. If Truman Capote gave me a book manuscript, I cannot deduct its value in a donation. If Jasper Johns gave me a painting, I cannot deduct its value in a donation. If Annie Leibovitz gave me original photographs…you get the idea.
What Can Be Tax Deducted
There are many items that can be donated and tax deducted, and here are some examples:
If a collector, in the course of his or her life, bought every Robert Louis Stevenson publication and wanted to donate the book collection to an institution, that could be tax deducted because there is a cost basis. The donor can calculate how much he or she spent in creating the collection.
If a donor’s grandfather received a letter from Theodore Roosevelt and it came down through the family, the FMV of the letter could be tax deducted by the donor. There is a tax loophole called the “stepped-up basis”. Once materials go through the estate process, the inheritors get the original cost basis (if any) eliminated; they get to claim the full fair market value of an item on the day of inheritance.
If a donor’s father bought a Thomas Jefferson letter and the donor inherited it, that could be tax deducted because of the stepped-up basis.
If Truman Capote gave me a book manuscript (or Jasper Johns bestowed upon me a painting), I could leave it to my heirs and they could deduct its FMV.
If the poet whom I mentioned in the opening paragraph left his papers to his children, that archive could be tax deducted since it will have gone through the estate tax and the stepped-up basis.
Two last points for archivists.
First, a qualified appraisal is only required if the donated material has a fair market value exceeding $5,000.
Second, archivists should be aware of the Art Advisory Panel. The board, which consists of up to twenty-five experts (some of whom are antiques dealers and curators) who serve without pay, reviews all appraisals with a single item with a claimed value of $50,000 or more. In other words, if the taxpayer donated 50, 500 or 5,000 items and just one has a value over $50,000, the Art Advisory Panel will give the appraisal extra scrutiny to make certain the valuation is correct. Do not let the word “Art” in the panel’s name fool you; if someone donate an inverted Jenny stamp or a 1971 Plymouth HemiCuda, both of which have a FMV in excess of $50,000, the board will give the donation appraisal an in-depth review. The Panel reviews both donation and estate tax appraisals.
If the IRS believes the monetary value assigned in the appraisal are significantly off (usually over-inflation for donations and under-inflation for estate taxes), the IRS can and will hire outside experts to challenge the original appraiser’s conclusions. In a recent case involving an estate, a Sotheby’s expert appraised artwork by the Flemish painter Pieter Brueghel the Younger at $500,000 in 2005. The IRS thought this valuation was too low, and it brought in their own expert, who presented evidence that the work was worth $2.1 million based on other recent sales. The tax court judge finally assigned the painting a fair market value of $1,995,000, meaning the estate had undervalued the painting and would likely owe hundreds of thousands of dollars in additional taxes, penalties and interests.
Of course, one can sell self-created materials to a private buyer or an institution and avoid many of these tax deduction issues.
About the author
Stuart Lutz is a Certified Member of the Appraisers Association of America (AAA), qualified in the field of Books and Manuscripts: Historic Documents. He is USPAP (Uniform Standards of Professional Appraisal Practice) compliant and has taught appraisal classes at the AAA. He has been in the historic document and manuscript field for over a quarter-century. He is the author of The Last Leaf: Voices of History’s Last Known Survivors (Prometheus Books, 2010), which contains almost forty interviews with the final survivors or last eyewitnesses of historically important events. His contact information is available via his website at http://www.historydocs.com and a fuller version of this article can be found here. The author notes that this article is not intended to be a substitute for professional tax advice.